Alcan and Interest Deductibility

The following op-ed, which is printed in today’s Vancouver Sun, picks up some key themes from this blog:

 
 

Subsidizing the transfer of jobs abroad
Vancouver Sun
Monday, June 4, 2007
Page: A7
Section: Editorial
Byline: Erin Weir
Source: Special to the Sun

At a time when Kitimat and many other Canadian communities are losing manufacturing jobs, why would the federal government continue subsidizing the transfer of such jobs abroad?

In the last federal budget, Finance Minister Jim Flaherty pledged to stop corporations from deducting interest on debt used to finance foreign affiliates from their Canadian taxes.

Ottawa should have kept this budget promise. Along with the provinces, it needs to develop economic strategies that maximize public returns from natural resources and create good jobs.

In the wake of Alcoa’s bid to take over Alcan, Flaherty has narrowed his budget measure to apply only to interest already deducted abroad and delayed its implementation for five years. In other words, corporations will generally be allowed to deduct foreign-affiliate interest costs in Canada even though they generally do not pay Canadian tax on their foreign-affiliate income.

Alcan is a Montreal-based multinational that processes aluminum in Kitimat and in Quebec. Bauxite, the basic raw material, is cheap to transport, but refining it into aluminum requires huge amounts of electricity. Therefore, Alcan mines bauxite in countries with rich deposits, but refines it in jurisdictions with cheap and plentiful electricity.

Dick Evans, Alcan’s CEO, had tried for months to merge with Alcoa, a Pittsburgh-based competitor. After talks broke down, and anticipating that Alcoa would consequently try to buy Alcan, Evans said in late April that the end of foreign-affiliate interest-deductibility made Alcan vulnerable to takeovers from countries that allow such deductions.

What he and other Canadian business leaders consistently neglect to mention is that many of these countries — including the U.S., Japan and Britain — tax the foreign-affiliate income of their corporations. Since Alcan does not pay Canadian tax on its foreign income, why should it deduct foreign financing costs in Canada?

Evans initially emphasized that bauxite mines abroad sustain aluminum processing in Canada. Then, on May 1, he announced that Alcan would invest in a huge new aluminum-processing facility in Saudi Arabia, which generates cheap electricity from its abundant natural gas. While this announcement was quickly overshadowed by Alcoa’s takeover bid, it proves that there is no global bauxite shortage and contradicts the notion that Alcan’s foreign investment aims to mine bauxite for processing in Canada.

Alcan processes aluminum in B.C. and Quebec not because the federal government provided tax incentives for foreign investment, but because these provinces provide cheap hydroelectricity. The company is reducing employment in Kitimat because it is more profitable to resell the electricity than to make aluminum with it.

If the province sold the electricity at market prices, the people of B.C. would receive the revenues. When Alcan resells the electricity, British Columbians receive neither the jobs nor the revenues. Although the B.C. Supreme Court recently ruled that this practice is legal, it is poor provincial policy.

By contrast, Saudi Arabia is collecting large public returns on its oil exports and using its natural gas to promote aluminum processing and other economic diversification. Canada should implement a similar economic strategy.

Erin Weir is an economist with the Canadian Labour Congress

5 comments

  • As suggested by the CLC, there are some big changes required for Plant closure policy from all levels. I recall researching a plant closing that much of the equipment within a plant was disassembled, cleaned and refurbished, and then shipped down to another sister plant in the US deep south for expansion. The entire cost for this disassembly was conducted in Canada and was therefore written off against Canadian taxes. We need to stop this type of behaviour. Given the volatility in the “oil” based dollar we could continue to see some very costly fixed capital being lost to such decision making lubricants . We need to put in place more rigidity for such decision making processes.

  • Dear Sir,

    Mr. Wier writes that Alcan smelts aluminium in BC and Quebec because those provinces provide cheap electricity. In BC this is not so. Alcan provides its own cheap electricity, which is made possible by both the government’s provision of the water licence for the company to use the water that falls into the lake that Alcan created back in the 50’s, and Alcan’s foresight at that time to risk the company on one of the most expensive private projects of all time.

    Mr Wier then goes on to say that Alcan’s proposed modernization of its Kitimat plant will result in the loss of jobs because it is more profitable to resell the electricity than to make aluminum with it. This too is incorrect. When the new plant is built a mere 40mw will be available at the plant gates, less than ever before, and this may reduce to zero from time to time. 40mw will light up only half of the Kitimat townsite. Job losses will be through attrition – something the Luddites could only dream of.

  • I agree that BC provides the cheap hydroelectricity in the form of (virtually) free water rights. While reducing employment through attrition is better than reducing it through layoffs, the fact remains that BC will receive far fewer jobs in exchange for these water rights.

  • The rates that Alcan pays for its water rights should reflect the risk that the company agreed to take at the request of the BC government in the 50’s. It is part of the deal struck at the time. Higher rates may not have encouraged Alcan to provide the infrastructure desired by the government of the day and which they themselves were not prepared to finance.

    Whats needed in Kitimat is the foresight of the local politicians and the community to build a diverse economic base on the back of the excitement and finite oportunity generated by the massive rebuild.

    The smashing of looms by the District of Kitimat does nothing to advance the fortunes of town or province.

    This oportunity will only last a few years, after which, if nothing has been achieved than the gnashing of teeth and the spending of money on lawyers, the town may have an assured future because of the rebuild, but it will still be below the critical mass neccessary to enable it to get past being thought of as a one company town.

    Carpe Diem!

  • I do not disagree that Kitimat politicians should try to diversify the community’s economy. However, I am not sure that BC should give away the water rights unconditionally in perpetuity based on a deal made half a century ago.

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